#10 Regulamageddon – The 2008 Financial Crisis

Capsule: #10 Regulamageddon – The 2008 Financial Crisis dissects what should have been a short, sharp recession that has instead evolved into the Obama Malaise. Learn about all of the contributing factors that amounted to a single cause for the housing bubble crash and financial meltdown.

Liberals Insist Over 600 Regulatory Agencies Aren’t Enough?!?

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Focus: Are California, New York, Michigan, New Jersey, Illinois, Greece, Portugal, Italy and Spain broke because they are too liberal, or not liberal enough? Does being broke provide more individual liberty or less?

Details:#10 Regulamageddon – The 2008 Financial Crisis is about the ultimate unintended consequence. Liberals thought they could regulate America into a utopian prosperity where everyone owns a house, two cars, big screen TVs, with lots of vacation time. Unfortunately, America has ended up with the Obama Malaise instead. Liberals blame President George W. Bush with his tax cuts, trickle down economics and supposed deregulation, but that is all they do, is blame. I have read dozens of articles and reports about the housing bubble and financial crisis, but have never read one that lays out in detail the actual mechanics of why President Bush is to blame. In fact, there were a dozen factors involved in creating the crisis, and none of them include tax cuts, trickle down economics or deregulation (no, the repeal of Glass-Steagal was insignificant, and was done by the Clinton administration anyway). Regulamageddon lays it all out in layman’s terms (mostly).

Excerpts: ~Many economists and financial types think the economy can be calculated – that given enough data and smart enough mathematics the marketplace can be understood and explained. This is simply untrue. To be sure, elements of the marketplace can be calculated, but not the overall macro economy. The marketplace runs on mass emotions. Every financial decision, large and small is susceptible to the emotional elements of fear and greed, and desire and revulsion, which often override rational mathematical calculations. That is why advertising works. That is why the marketplace does what seems to be irrational things. That is why the marketplace is so hard to predict. That also is why when the American markets react to some economic news or calamity, markets around the world often immediately follow. And that is how market bubbles inflate with little notice until too late. … More than anything the economy needs to be psychoanalyzed to be understood (if it can be). If the economy could be calculated, every boom and bust could be avoided and we would have continuous smooth sailing. Anybody see that anywhere? So when someone comes along and claims that they have the math and the graphs to explain what the economy has done or is doing or will do, laugh and move on, American neighbor. We instead, will do a little psychoanalysis.~

Preface: The Nuclear Counterarguments Essay Series is written for both contemporary American liberals and contemporary American conservatives – for the liberal (or progressive) as an exit counseling process with the purpose of removing the inherent paranoia that prevents them from seeing that in their core belief they are, in fact not a liberal, and for the conservative as a strategy for dealing with liberal acquaintances. (FYI, I am a Canadian – the implications of this are explained in the Introduction and #1 Deprogramming Liberalism with Nuclear Counterarguments.)

[All citations are active number/letter codes. Code links beginning with an * indicate that the linked page has additional information for the topic at hand. Links without an * are cited for evidence of existence and reference only, as in a quotation or number or case in point. Citations validate my points so that you can trust my claims, and will often provide you with invaluable supplemental information.]

• Mini critical thinking exercise

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~Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a law-breaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.~ – Louis D. Brandeis – Source: Dissent “Olmstead v. United States”, 277 U.S. 438, 485 (1928)

Answer this, American neighbor: As a principle, does more government control result in more opportunity for prosperity on a national scale, or less?ab

• Are failing liberal states like California & Illinois not liberal enough?

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I have a few 800 pound gorilla questions for you, American neighbor. Why do you think it is that the states that have fared the worst throughout the current Obama Malaise are states with very liberal agendas? I.E. California, New York, Michigan, New Jersey, Illinois. (Hint = [*3hbvnvr, *nd9epuq, *2u8kzp6, * bnn5dy5, *7w6sry5, *mnwt6ea, *m9wspz6]) Or what about Greece, Portugal, Italy and Spain? They are all broke. What did all of these countries and states do wrong? • Was it that free market capitalism failed them? • Were there just too many privately owned companies? • Were there just not enough unionized government workers? • Did they not promise big enough pensions to their government workers with early enough retirements? • Did they not tax, borrow and spend enough to stimulate their economies? • Did they just not tax enough? • Was there just not enough government regulation? • Was it that damned conservatism and free market capitalism that brought these states to their economic knees? • Is the answer just more liberalism and less free market capitalism? • Would they have fared better with more unions, more subprime loans, more deficit borrowing, more price controls, more artificial lowering of interest rates, more government regulation, higher property taxes, more government unionized workers, higher sales taxes, earlier union retirement, more government regulation, more printing of money, higher retirement payouts, higher income taxes, more government benefits, more government regulation, higher debt, less domestic oil drilling, more government healthcare, more house flipping, more bailouts, less work hours, more vacation time, more illegal aliens, more environmental restrictions, higher gasoline taxes, more government regulation, more government supplied health benefits, more licensing requirements, more deficit spending, more regulatory taxation penalties, more food stamps, more government regulation, a higher minimum wage, more government subsidies, and more politicians willing to buy off liberal agenda groups with tax money, and more government regulation? • In other words, did these states just not institute enough liberalism to be economically successful?ac

• Liberal over-regulation is a result of paranoia

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Sorry about the oft-repeated, “more government regulation”, but that is the single most important reason for the American economy’s current downfall and its increasing uncompetitiveness. If you don’t believe me, American neighbor, read these links and learn some things even many conservatives don’t know: The cost of regulations is massive, both fiscally and health wise. [*3advefv, *2cz5aqc, *3h2s5vn, *3eteq76, *95srxby]

Copyright 2012 Jim Autio License Note: Although free, this essay remains the copyrighted property of the author, and may not be reproduced, copied or distributed for commercial or non-commercial purposes. For fair use only.

~According to a report recently released by the Small Business Administration, total regulatory costs amount to about $1.75 trillion annually, nearly twice as much as all individual income taxes collected last year.~ [4exgoqs]

Overcriminalization through regulation is an enormous unjustified burden on the business community and America as a whole. [*326wedb, *2fpekva] And many regulations just plain stifle the startup of new businesses. [*2cbu5ub] (800 pound gorilla question coming…) Guess which ideology promotes more and more regulation, American neighbor? Hint again – it isn’t conservatism. And one more hint: Most regulation is a direct result of compulsive paranoia. Liberals are terrified of anything they feel that they do not control. Lack of a feeling of control produces the fear of a collective utopia not yet reached. So every little event or entity that might threaten progress toward utopia must be regulated to death. Collective utopia is when there are enough regulations and restrictions on individuals, groups and business to prevent all supposed maladies which might affect society. Liberal utopia is achieved when the collective completely directs your life, American neighbor – progressive-fascism. Is that what you consider liberty?ad

• 2008 financial crisis caused by a what, not a who

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OK, OK, American neighbor. I realize that since early in this essay series you may have been screaming, “WHAT ABOUT THE ECONOMIC DISASTER BUSH LEFT OBAMA?!?” First let me remind you that I did not blame President Clinton or his policies for the tech bubble bust. I just contrasted liberals crediting Clinton for the roaring economy in the nineties with the facts that said otherwise. I don’t particularly give him or the Contract With America credit for the “irrational exuberance” that led to the tech bubble, or its collapse. Likewise I don’t see evidence to lay blame at President Bush’s feet for the housing bubble and the financial crisis that followed the bubble bust. The financial crisis was not caused by so much as who as it was by what. Although I support the idea that tax increases and tax cuts influence the economy as significant market forces (illustrated in #8 The Not So Surprising History of Tax Cuts), as you will see, there are other elements of the marketplace that can trump anything politicians do or do not do. Yes, some specific people can be identified as having moved the crisis ball along over the years, but there is a specific meme that kept this ball rolling for decades until its climax in late 2008. I am a big believer in the existence of market forces, business cycles and societal influences (obviously – as per the theme of the essay series). The economic crisis of 2008 was just another step in that ongoing process, as you will see.ae

• 2008 financial crisis although global was rooted in the U.S.

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It has been claimed that the 2008 crash was global and therefore could not have been solely caused by the American marketplace. For instance other countries had housing bubbles – Spain, the UK, Ireland, France, etc. Low interest rates and a booming world economy allowed for these. The accompanying table illustrates that the U.S. alone had a serious foreclosure problem. [44xexdz] But it was not the bubble that was the actual problem, but what was done with the credit of the bubble. The securitization of the credit was an American device that was then implemented almost worldwide (more later). And those other country’s bubbles did not burst on their own. They followed the American real estate bust. The American marketplace is by far the largest and most influential in the world. When financial things happen in America they affect the whole world. When American banks follow a new strategy to make profits, much of the world follows – who wants to be left behind? The biggest banks in the world are also international, so when they do something in America the consequences are often felt throughout much of the world. But not necessarily everywhere. Canada was little affected by the American financial crisis, so it was not entirely global. Neither was China (they are America’s two largest trading partners). The American economy leads and the world for the most part follows. And when the American government influences the American marketplace in a big way as they did with real estate and banking regulations, the consequences are later felt throughout the world.af

• The market needs to be psychoanalyzed

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Many economists and financial types think the economy can be calculated – that given enough data and smart enough mathematics the marketplace can be understood and explained. This is simply untrue. To be sure, elements of the marketplace can be calculated, but not the overall macro economy. The marketplace runs on mass emotions. Every financial decision, large and small is susceptible to the emotional elements of fear and greed, and desire and revulsion, which often override rational mathematical calculations. That is why advertising works. That is why the marketplace does what seems to be irrational things. That is why the marketplace is so hard to predict. That also is why when the American markets react to some economic news or calamity, markets around the world often immediately follow. And that is how market bubbles inflate with little notice until too late.

More than anything the economy needs to be psychoanalyzed to be understood (if it can be). If the economy could be calculated, every boom and bust could be avoided and we would have continuous smooth sailing. Anybody see that anywhere? So when someone comes along and claims that they have the math and the graphs to explain what the economy has done or is doing or will do, laugh and move on, American neighbor. We instead, will do a little psychoanalysis.ag

• Bob, his family business, & the 2008 financial crisis

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Let’s say Bob runs a family business, American neighbor. Many members of his family work for him. The trouble is, Bob is the key to making money. The nature of the business calls for one specific talent that only Bob has. If Bob dies the business would die and everyone would lose their jobs and income. So all of the family members take out life insurance policies on Bob. So now if Bob dies or is somehow incapacitated everyone working for him will collect on their insurance policies and offset their loss of income. In regard to the housing bubble bust you have probably heard of derivatives and credit default swaps (CDS). These are similar to insurance policies, but on loans. So when you take out a mortgage loan your bank (or whoever ends up backing your loan) may purchase an insurance policy (CDS) on it so that if you default on your mortgage payments the bank won’t lose their shirt on the whole mortgage.

But going back to Bob, we see that many insurance policies were taken out on just him. The banking industry has done the same thing. There is nothing illegal or particularly nefarious about this practice in principle, but the reality has turned out to be much different. You see, American neighbor, when Bob dies many insurance policies will have to be paid out, so that if he dies young, meaning that very little of the anticipated premiums to the insurance companies had been paid, it is likely that the insurance companies will lose money on the whole transaction. They make money by betting that Bob will live many productive years and the amount paid for the insurance plans, and the investment returns on that money, will cover any eventual payout along with a tidy profit. Well the financial industry was betting the same thing on mortgages with credit default swaps. They were counting on the vast majority of mortgages being paid in full.

When someone defaults on their mortgage one or more CDS may be paid out between various investment and insurance institutions. There may be more than one CDS per mortgage because of what is known as leverage. There is enough money, or what is known as liquidity, in the system to cover slightly more than the average peak amount of mortgage defaults each year. What happened with the housing bubble bust is that many, many more mortgages defaulted than there was liquidity in the system to cover all of the so-called insurance payouts. The insurance companies have had trillions of dollars in these credit default swaps prematurely come due and didn’t have the money to pay. This was the essence of the so-called credit crisis.

I am going to explain to you what I have discovered about the cause of the 2008 financial crisis and resulting recession, American neighbor. Included in my explanations are many technical terms you may not be familiar with. I’ll do my best to explain each one that I think is pertinent, but if you are not familiar with a term try a search for it on the internet. Wikipedia may be of some help.ah

• Liberalism caused the 2008 financial crisis 1

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Ask a liberal for the cause of the financial crisis that began in late 2008 (although the decline began in 2007) and the stock answers are the Republican’s supposed deregulation of financial markets, and/or a failure of laissez-faire, free market capitalism, or even more ridiculously, President Bush’s tax cuts. But I have learned not to bother asking liberals for details, because the accusation is usually where the explanation ends. Every liberal so-called explanation I have read has been filled with so much one-sided playing stupid as to be just laughable. This should be an 800 pound gorilla for you, American neighbor. In reality there was no one policy that caused the financial crisis. To think that there was just one or two simple policies that could produce such a complicated result as the housing bubble bust, financial crash, recession and the subsequent Obama Malaise is to think simplemindedly (liberal). In fact this financial disaster was the result of a confluence of over a dozen government policies, regulatory inaction, and market practices, some with origins dating back decades. However, they can be summed up under one set of principles, as you will see, American neighbor.

Is this a Democrat versus Republican issue? Yes and no. Yes in that Democrats were the driving force behind many of the steps leading to the crisis. And no in that the Republicans supported many of the steps as well. But more than anything the crisis was a result of misplaced big government intervention in the marketplace (carrot and stick capitalism – see #6 Tyranny Versus Liberty) combined with John Dewey’s central tenet that what a person earns should not necessarily determine what they deserve. These two elements more than anything point to liberalism as the primary cause of the financial crisis.

To fully understand how the 2008 financial crisis developed, it is imperative to recognize the historical steps that led to it. It is of primary importance to understand that the most important causative ingredient was liberalism. Because liberalism teaches that motives are paramount over results liberal political leaders recklessly implemented policies to satisfy their motives to supposedly help the lowly in society without concern for the ultimate results. On top of this, the Dewey/liberal ideal of equal outcomes taught society that everyone deserved a house, a couple of cars, large screen TVs, etc. whether they could actually afford them or not. Liberalism gave approval to the government to live beyond its means by borrowing from its future citizens to pay for its indulgences today, and print money as needed, and liberalism also gave approval to society’s citizens to live it up on unmanageable credit. Liberalism also forced bankers to provide very risky credit with high probability of default, so the banks innovated with derivatives in an attempt to protect their money, but unfortunately it didn’t work out so well. With the limited moral restraints of Dewey’s consequential liberalism where anything goes as long as it is legal (and sometimes even if it isn’t), the government, consumers and bankers pushed credit to unimaginable limits to meet their supposed motives of helping the lowly and helping themselves, but as is always the case with liberalism, we must now deal with the unintended consequences.ai

• The CRA & securitization

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During the Carter administration two very important policies were enacted which have greatly contributed to the genesis of the financial crisis of 2008. The first was the infamous Community Reinvestment Act of 1977 (CRA). [bv49fn3, d9pd4fh, kx8tlrv] At that time it was rather weak and deliberately vague legislation directing commercial banks to meet lending requirements in order to qualify for new branch openings and mergers with other banks. The CRA did not work in isolation however, but as a companion to other legislations under the same umbrella (Equal Credit Opportunity Act, Home Mortgage Disclosure Act, Fair Housing Act). The primary purpose was to discourage “red-lining” where poor neighborhoods deemed high risk were normally refused mortgages. Liberal activists blamed red-lining on racism by the banks, but as can be seen in the accompanying table minority-owned banks were also denying minorities loans at higher rates than whites, illustrating that the higher denial rates were not based on race, but economic considerations. This led to the infamous “subprime” loans at the heart of the 2008 financial crisis. Of course, there was a lot of politics also involved and it is interesting that the original data that was used to justify the creation of the CRA has since been proven to be faulty, and the result of the legislation and its companions didn’t so much fix the problems they were aimed at, but instead set up a situation that encouraged the subprime loans and other lesser loans that ended up multiplying mortgage defaults. The second relevant policy enacted by the Carter administration is something known as “credit securitization” of loans, including mortgages. [yfveugu, 24yf5lw, 2a7ukjo] This allows a commercial bank to package loans together and farm them out as bonds, providing a money flow where more loans could be made and provide some safety for the high risk of the CRA mandated loans. In 1988 the Switzerland based Basel Committee established the credit securitization known as credit default swaps. Though the CRA has garnered all of the press, credit securitization in combination with the CRA has actually technically turned out to be as much of a culprit. One other piece of legislation that was more peripheral, but still of some significance was the 1980 Depository Institutions Deregulation and Monetary Control Act which loosened some Glass-Steagall powers (more later) among other things.aj

• Subprime loans for those who can’t pay for them

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The CRA had very little muscle to it until President Bill Clinton, along with a Democrat Congress, enacted the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 which directed Freddie Mac and Fannie Mae, quasi banks each known as a government sponsored enterprise (GSE), to purchase what were then known as subprime mortgages from commercial banks and repackage them as mortgage-backed securities, and sell them through the secondary mortgage market. The “sponsored” part meant that the government guaranteed that in the event of an economic crisis Fannie and Freddie would not be allowed to fail. [82bfjrx, lkyryk] This turned out to be catastrophic strategy that encouraged very risky behavior by Freddie and Fannie, the banking industry and consumers of credit. Banks benefited by receiving the money for their loans upfront, but the mortgages had to meet the requirements of Fannie, Freddie, the CRA, etc. About the CRA the then Attorney General threatened, “no loan is exempt, no bank is immune. For those who thumb their nose at us, I promise vigorous enforcement.” [7jevbxx, *ctq2973] In 1995 and again in 1999 President Clinton ordered the administration arm known as Housing and Urban Development (HUD) who were charged with setting the CRA commercial bank qualifications, to expand the requirements for bank compliance and lower underwriting standards. [5t4nq7, 2w88lpg, 5nojss, yjq6drg] These were again later expanded by the Bush administration, each time encouraging that more subprime loans be made.

~Half of all mortgages in the United States—28 million out of 55 million—were subprime or very low quality by 2008. And of these 28 million loans, three quarters were on the federal government’s books.~ [b7o2q8d]

Another element contributing to the proliferation of these subprime loans and other questionable loans and their resultant derivatives were eager ratings agencies who were supposed to warn about risky securities like these, but at the encouragement of government and busybody liberal activist groups, and within a system where the ratings firms earned significant profit from approving these risky loans, they instead gave them their stamp of approval. [3a3e396, 2ukxa2g]

Added to the mix was a new risk assessment formula that encouraged what are named Collateralized Debt Obligations that became almost impossible to assess once the bubble deflated. [dd5uzb, cl4y7f] This new Gaussian copula function allowed for grouping high-risk loans into what were supposedly low-risk securities. The story of this financial computer model is typical of the liberal mindset. It is little different from what liberals are doing with computer models for global warming projections. Liberals have an unrealistic faith in the ability to scientifically calculate solutions to problems that are essentially incalculable (remember above where I suggested that the marketplace cannot be calculated, but rather should be psychoanalyzed). The results have been the same for the global warming model projections – complete failure (more in subsequent essays).

Although only a fraction of the toxic loans that caused the financial crisis were made under the jurisdiction of the CRA, the importance of the CRA is the precedence it set in directing the actions of Freddie and Fannie to securitize subprime loans. If the government could order subprime mortgages to be made that could be securitized for a fast profit even though the chance of the loan being paid back was minimal, why should the banks not take advantage of the same situation to make some quick bucks? But the banks could see where these risky loans were leading so they created vehicles to spread the risk. Unfortunately their strategy only partially worked. Some came out sitting pretty, some crashed. It’s kind of hard to fault the banks when they were only following the government’s charge down the hill. Remember our quote from the MCTE at the beginning of this essay:

~Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a law-breaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.~ – Louis D. Brandeis – Source: In his dissent in the case “Olmstead v. United States”, 277 U.S. 438, 485 (1928)ak

• Forcing the CRA on the banks

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Enforcement of the CRA was through federal regulatory agencies determining approval of bank branch openings and bank mergers and acquisitions based on compliance to the CRA requirements. In short, in order for a bank to grow they would have to make these high risk loans and absorb the risk of any resulting securitization they invested in. Included in the regulations, liberal community groups were given standing to agitate for compliance, make allegations of perceived violations, and formally present their case to the regulatory agencies for their consideration. [ylpk4ga, cwert2, 7vdxmer, yze3ort] “Community organizers” not unlike what Barack Obama once was, would run these groups. Indeed, Barack Obama was directly involved in training and funding Chicago ACORN activists in agitation techniques. [yb9lmmk]

~ “When I ran project vote, the voter registration drive in Illinois, ACORN was smack dab in the middle of it. Once I was elected there wasn’t a campaign that ACORN worked on down in Springfield that I wasn’t right there with you. Since I have been in the United States Senate I’ve been always a partner with ACORN as well. I’ve been fighting with ACORN, along side ACORN, on issues you care about my entire career.”~ [ca8ug6v]

ACORN and other groups went as far as public demonstrations, occupying bank offices, and intimidating management (even at their homes) with race baiting and threats of boycotts. They were Blackshirts of the Democratic Party (they still are under new names). Democrats quickly discovered that the issue could be used to demagogue Republicans into acquiescence, fearing being labelled as racists. Opponents objected that these higher risk loans could open a can of worms that could eventually threaten lending institutions (a financial crisis). Liberal proponents at the time assured that there would be no additional risk to these institutions.

On top of the subprime mortgages of the CRA were supposedly more credit worthy loans called Alt-A & option ARM mortgages with low introductory interest rates (teaser rates) that climb over a specified period of years. [66u37r, 38y8n2r] The major defaulting of the subprimes devalued the housing market as houses flooded the market, leading to more defaults further up the credit worthiness chain. As the housing bubble bust deflated home prices across the board, these supposedly safer mortgages also became toxic as homes went “underwater”, a term referring to when the amount owing on a mortgage has become higher than the current value of the property. This multiplied the amount of owners walking away from their mortgages, and of course magnified and lengthened the effect of the bubble bust. So even though only a small percentage of defaulted houses were subprimes under the jurisdiction of the CRA, they led to a domino effect affecting the whole real estate market as can be seen in the accompanying table. [44xexdz] Adding to this domino effect was the risk of Fannie and Freddie going bankrupt and dragging other institutions with them. At this point the housing bubble completely deflated as defaults and houses for sale saturated the market. The bubble was built up by government manipulation, and crashed because of that manipulation. [7an9qfm]al

• Liberal entitlement attitude creates artificial demand

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The CRA encouraged two important problems – a consumer attitude of entitlement to easy credit, and an industry attitude of entitlement to easy profits on credit securitization. The first encouraged consumer purchasing of everything on credit with little regard for income compatibility and stability. The second encouraged the doling out of credit on everything regardless of the likelihood of repayment. Both can be attributed to unintended consequences of John Dewey’s resultant liberalism as described by Associate Justice of the Supreme Court, Louis D. Brandeis in our above MCTE. Freddie and Fannie’s tremendous apparent profits, blessed by the government, encouraged other segments of the banking industry to develop mortgage securities and other credit securities of their own, including what are called credit default swaps (CDS, a type of OTC derivative) as a sort of insurance policy on mortgage backed bonds. [35288c2]

These were then multiplied to the point where the failure of one bond (by the failure of the underlying mortgage) meant the insurance would have to cover multiple CDS connected to that one bond. Of course when the crisis hit they could not do it and the banks failed. It is primarily CDS that are currently referred to as the “toxic assets” that are at the root of the financial crisis.

One other important consequence of the CRA subprime loans is that Fannie and Freddie created an artificial demand for homes that drove up housing prices, greatly contributing to the housing bubble. And added to this was a provision in the Taxpayer Relief Act of 1997 [3x5qygl, bsfzd] that exempted home sales from capital-gains taxes, proposed by Bill Clinton and adopted by a Republican majority Congress. This encouraged what is known as house flipping which magnified the bubble all the more.fa

• Fair value accounting

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Also introduced early in the Clinton administration (1993) was what is know as fair value accounting. [367oygf, dcktcu] This mark to market system imposed on the banks what turned out to be an uncertain value of the mortgage-based securities after the housing bubble bust and the resulting real estate price plunge. This prevented the banks from lending based on these securities, creating a freezing of some capital – contributing to the financial crisis (or at least supposedly so – more later). Further regulation of the derivatives market had been debated over the years, but due to the complexity of the market it had been left mostly to the international players to regulate themselves.am

• Rejected OTC derivative market regulation in 1998

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There was a proposal by the Commodity Futures Trading Commission (CFTC) to regulate the OTC derivative market in 1998, but it was rejected by Congress when the banking industry objected along with the Federal Reserve, the Securities and Exchange Commission, the Treasury and the Presidential Working Group on Financial Markets. This may have been the best opportunity to blunt what turned out to be a mostly derivative based crash in 2008. It is important to note, however, that not all derivatives are mortgage based. In fact, most derivatives are swaps on corporate, municipal and state bonds, currency swaps and commodity hedges. These majority of derivatives did not contribute in any way to the housing bust and financial meltdown. This crisis was much bigger than just regulating derivatives. Then Fed chairman Alan Greenspan later admitted in testimony before a congressional committee that the rejection of the CFTC recommendations was a mistake. [29hegzx]an

• Removal of the Glass-Steagall act in 1999

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The next possible nail in the coffin was the repeal of the Glass-Steagall act in 1999 [29u5qb] which had kept investment banking and commercial banking as separate entities, as well as the insurance industry. European banks were never so segregated and the barrier removal would place everyone on a level international playing field. (Canadian separation of investment and commercial banks had ended in 1987 and few would argue the point that Canada weathered the financial crisis much better than any other Western nation.) This lack of segregation in Europe had never before led to the problems that may have contributed to the financial crisis, so it is questionable as to how much this actually affected the problem (correlation is not causation). This final removal of Glass-Steagall was only the last in a long list of changes to it over a period of decades and was not nearly as dramatic a change as it has been made out. Glass-Steagall never did prohibit the securities involved in the financial crisis. In fact, it was the empowerment of Freddie Mac and Fannie Mae in the early nineties that had essentially bypassed Glass-Steagall that led to the demand for a full repeal of the Glass-Steagall act to level the playing field for private industry banks who had to compete in the market of Freddie Mac and Fannie Mae, but did not have the advantages they had. This, along with the Commodity Futures Modernization Act of 2000 [49ee62] which was instituted to legalize the swaps market that had been operating outside of regulation and the law (but not illegally), known as a dark market, led to the amalgamated banks use of highly leveraged mortgage derivatives (bonds and credit default swaps) and other related derivatives based on securitization (this was the response in place of the rejected CFTC’s much more restrictive recommendations). The repeal of the Glass-Steagall act was signed by President Clinton as a result of years of lobbying of Congress by the banking industry and Robert Rubin. [7dxuvgh, 27lq32f] Rubin stepped down from the Clinton administration Treasury Secretary position only months before the bill was signed by the President to head up the chairmanship of Citigroup. It thus came to be known as the “Citigroup Authorization Act”. [347czfh]

This paved the way for investment banks to take full advantage of mortgage backed securities and bundle them into relatively unregulated hedge funds, of which banks like Citigroup played an ever-expanding role along with Freddie Mac and Fannie Mae. AIG as an insurance company also benefited as a supplier of CDS and was the only company seriously affected by them.ea

• Predatory lending

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The hot term for liberals in regard to the housing collapse was predatory lending. Supposedly unscrupulous lending institutions caused the collapse with aggressive mortgage vending to those who couldn’t afford to pay the debt. In fact, the CRA itself was an endorsement of predatory lending and at the least encouraged it, if not explicitly mandating it. In 2002 the Home Ownership and Equity Protection Act was strengthened against predatory lending. [punhvmg] This had mixed results with varied state implementation. Predatory lending in some states went down, while in some states it went up. In effect, this seems to have been a state implementation problem rather than a lack of regulation problem. In 2004 the federal regulator, Office of the Comptroller of the Currency attempted to standardize the rules, again with mixed results. These are further examples of where more regulation produced little in beneficial results. It is interesting that liberals virtually always favor federal regulation over state regulation, but with this situation, because they have seen an opportunity to place blame on the Bush administration, they object to the federal regulation and claim that the states should have been left in control. The problem, however, was much deeper than regulation of predatory lending. The whole system was based on lending vast sums of money to people who had no reasonable chance of paying it back – forced on the mortgage industry by the federal government, and then embraced by the industry for quick profits. In effect, the federal government has turned out to be the biggest predatory lender of all.ao

• Little deregulation over the decades

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In actual fact there has been very little government deregulation related to the 2008 financial crisis over the last thirty years, and a multitude of increased regulation. [dymh2o] The few government deregulation exceptions are the Glass-Steagall act in 1999, the Garn–St. Germain Depository Institutions Act of 1982 (with its notorious 11th hour snuck-in insurance amendment) which contributed to the savings and loans crisis of the late 1980s, and the Depository Institutions Deregulation and Monetary Control Act of 1980. A reaction to the savings and loan debacle was the Financial Institutions Reform, Recovery and Enforcement Act of 1989 which dealt with problems created by the Garn–St. Germain Depository Institutions Act. Outside of direct government control was the SEC decision to allow increased levels of bank debt in 2004, and lax regulation enforcement by the bureaucratic regulators of the ratings agencies, and bank transparency in regard to leverage and dark market security vehicles.ap

• Regulation doesn’t prevent new financial crises from developing

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Regulation budgets have multiplied in size for every financial, monetary and housing regulatory government agency by 10 to 15 times over the last 50 years. [8yr53u8] There are literally many dozens of pieces of regulatory legislation on the books for banks alone, along with a number of regulatory agencies. It is not like regulation is any sort of guarantee of preventing market crises, as with the oil crisis in the seventies, the Latin debt crisis and the Japanese economic bubble bust in the eighties, the savings and loan crisis also in the eighties, the Mexican peso crisis and the Asian financial crisis in the nineties, and of course the dot com bubble bust, and the Enron, Tyco, Worldcom, Arthur Anderson, Global Crossing, Nortel, Rite Aid, Xerox, etc. debacle, along with the folding of the Long Term Capital Management hedge fund in 2000, and the collapse of Madoff Investment Securities in 2008. Regulation is often in response to an already existing or past crisis and is rarely preventative of new bubbles. Perhaps the above mentioned CFTC regulation proposal in 1998 may have blunted the eventual crash, but there were so many additional factors it is hard to know for sure. And there were a number of attempts at regulating Freddie Mac and Fannie Mae during the Bush administration, but each time there seemed to be complications from one party or the other. Preventing a market crisis through regulation is a fool’s game. You can regulate the free market to the point of government command capitalism, but even that won’t stop the development of a market crisis. Often, it is the regulation itself that causes or greatly contributes to the crisis, as was the case with the 2008 financial crisis. The answer is ideology not regulation (but that is not the topic here – more later).aq

• Banking sector leverage rates increased in 2004

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Another huge nail in the credit crisis coffin was the SEC rule change in 2004 that increased the leverage rates for the banking industry dealing with these mortgage securities from 12:1 to 40:1, essentially guaranteeing a meltdown of the banking sector with the slightest disruption of the market. [347e9sr]ar

• Artificially low interest rates

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The final nail in the coffin was the artificially low interest rates produced by the Federal Reserve over a period of years in response to the 2000 recession that resulted in the housing bubble – an artificially high demand for real estate combined with unsustainable housing prices, and overly optimistic homeowner refinancing. [6z4v6u] Because of the Fed’s actions this was the first time a recession did not result in housing prices going down, leading to a misplaced belief that they would never go down – the hook that so many in the marketplace have been dearly paying for over the last few years. Indeed this was just the prescription of liberal economist guru Paul Krugman in 2002:

~To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.~ [lrnmab]

The importance of this element of the crash cannot be overemphasized. These artificially low interest rates determined by the Federal Reserve and encouraged by liberal economists like Paul Krugman discouraged consumer savings and instead encouraged consumer spending on all types of questionable credit such as adjustable rate mortgages and introductory low rate credit cards and low interest refinancing loans, and the development of resulting derivatives that became the toxic stew of the financial crisis. The subsequent risk of this securitization was then compounded by what is known as interest arbitrage or borrowing short and lending long with increasingly higher leverage rates. [3yykphp, 2wqfkgd] Low interest rates also sent money from solid municipal bonds and other low yield instruments into the risky securities market. Thus the table was set for the housing bubble crash and financial crisis. (For these reasons, if I was pressed to name one person to blame the financial crisis on, I would name Paul Krugman for providing the “intellectual” gravitas to the idea of deliberately creating a housing and credit bubble.)as

• A crash from a push?

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This amalgamation of government policies, market practices and consumer irresponsibility came to a confluence on September 11, 2008 (or possibly Sept. 15 – the exact date is murky) when the legs were kicked out from beneath the credit system. [c2kdsy, bhsmv7] On this date, still publicly unknown entities supposedly began an “illegal” run on the American banking sector. (This was the cover story.) That morning money market accounts were supposedly suddenly drained of 550 billion dollars in about an hour’s time. When the Federal Reserve and the Treasury noticed, they attempted to reduce the impact with an infusion of 105 billion dollars into the system. This supposedly failed and their only alternative was to shut down the money market accounts for the day. But the damage supposedly was done. This act was supposedly a deliberate sabotage of the banking system. It would have to have been perpetrated by very big players, possibly countries. Because of the bubble that had developed, it needed only a slight agitation to cause it to burst. This supposed run on the banks was the pin prick. It was supposedly this day that was later referred to by then President Bush and other politicians as the point where the country’s economy came close to complete collapse. (Is it only coincidence that this was only a week after the Republican Convention when John McCain had momentum in the race for the Presidency and was leading in the polls for the first time? [yhf4vmz] We may never know, but after this McCain’s support eroded as the public blamed the incumbent administration and the Republican party for the economic calamity, and Barack Obama won the Presidency.) But did it really happen like this? Was there really a run on the banks this large and nobody but a few in the Treasury and the Fed knew about it? Something happened, but it is unlikely that it was a run on the banks. There’s seems to be a conspiracy of silence. No one asks about it and no one that knows about it volunteers anything. Why? Is it because it was an artificial crisis designed to sabotage McCain’s support in the election? After all, without this supposed crisis moment at that particular time John McCain might now be President McCain. The Republican House majority should look into this. And even if it had nothing to do with the election and was a legitimate crisis moment, it still should be publicly known. And if there was nothing, what was President Bush referring to? Why the panicked response with the TARP? Contrary to the administration’s claim that TARP turned a profit, it actually has cost the economy tens of billions of dollars. [d9ac6vl] And then there is this Pentagon report: [*4t27cs2]at

• 2008 financial crisis predicted

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The market now has little faith in securitized loans. The combination of the above factors coalesced into the financial crisis of which we are now experiencing the consequences of, that was based on overly leveraged derivatives, produced by a consolidation of legislation enacted over decades, where the underlying capitol failed due to the bursting of the housing bubble. In fact, the NY Times predicted just such an outcome as far back as 1999:

~ “In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.”~ [37obr2z]

In 2005 Bloomberg reported then Chairman of the Federal Reserve, Alan Greenspan as having warned:

~If Freddie and Fannie “…continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road. […] We are placing the total financial system of the future at a substantial risk.”~ [33evcxt]au

• Democrats block regulation of Fannie Mae & Freddie Mac

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Later in 2005 the Washington Post reported that Senate Republicans and the Bush administration heeded that advice, twice introducing legislation to increase regulation to reduce Fannie Mae’s and Freddie Mac’s risk:

~ “Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) yesterday released legislation that could force mortgage finance companies Fannie Mae and Freddie Mac to significantly reduce their combined $1.5 trillion investment portfolios. […] Both the White House and Federal Reserve Chairman Alan Greenspan say Fannie Mae and Freddie Mac pose a risk to the economy because they have grown too large. […] In a version of the bill approved by Oxley’s committee in May, the new regulator would be able to adjust the size of the companies’ portfolios to keep them from running into financial trouble. In Shelby’s bill, by contrast, the regulator would also be able to look more broadly at whether the size of either company poses a risk to the financial system. The regulator would also have the power to force Fannie Mae and Freddie Mac to dispose of assets that do not help them fulfill their housing mission.”~ [36ugp48]

Admittedly this legislation may not have entirely prevented the financial crisis by itself, but it certainly would have reduced its impact and may have led to less risk taking and a more conservative approach in the banking industry that may have cushioned the depth of the crisis. The Senate Democrats blocked its passage, insisting there was little risk. Indeed, Bill Clinton has since laid the blame squarely on congressional Democrats for resisting regulation of Fannie Mae and Freddie Mac:

~ “I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was President to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”~ [5x3rcq]av

• Liberalism caused the 2008 financial crisis 2

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The financial crisis of 2008 was not a result of Bush administration deregulation, or President Bush’s tax cuts, or unfettered laissez-faire free markets as liberals often flippantly claim. Remember, I said at the beginning of this discussion: “The financial crisis was not caused by so much as who as it was what.” Many pieces of legislation from many administrations and many congresses directly and indirectly contributed to the disaster, including accounting and trading regulation that immensely complicated securitization of mortgages and other types of credit to the point that many of the derivatives have ended up with undefinable value. But let’s be clear. The problems resulting from derivatives were symptoms and consequences, not causes. Did derivatives compound the problems? Sure. But it wasn’t the derivatives that produced the housing meltdown. It was bad apples that fell close to the tree. There are villains on all sides of the ledger, American neighbor. [*89j8kyy] Contrary to liberal claims, the marketplace was lulled into a meltdown through an exacerbation by John Dewey’s influence and unintended consequences on an educational system and society as a whole that cast aside the moral of prudence, refusing to teach economic responsibility, and instead producing reckless consumers with an entitlement attitude, an equally reckless financial community, along with a market meddling government promising utopia, but delivering dystopia. It was, in one word – liberalism. It was the no-morals attitude of John Dewey’s apple tree that created the subsequent liberalism that infested all of these bad apples with worms, American neighbor.aw

• Recipe for a financial disaster

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Because the above explanation is necessarily filled with market techno-babble, I’ve put together an alternate explanation in plain language for those who are not familiar with the phraseology (and whose eyes have glazed over), and are not interested enough to do the research necessary to understand it (I don’t blame you). (Be sure to read this with your Mr. Spock third person analysis turned up to maximum, American neighbor.) So, if one would want to create another similar financial crisis sometime in the future, here is the recipe that has been so successful at serving up a smorgasbord of misery this time round:

1. Start with a bunch of liberal Democrats over a period of decades that are eager to use liberal government meddling in the marketplace to shape the marketplace. Add a societal influence through John Dewey’s resultant liberal education and a liberal media that encourages consumers to be eager to have everything now whether they can afford it or not. And also add unrestrained bankers also influenced by John Dewey’s resultant liberal education willing to push the limits of greed, just because they can.

2. Pass liberal legislation forcing risky loans on the banking system to manipulate the marketplace so people who can’t afford to own a home can own one for awhile and then walk away from it.

3. Include liberal community groups who use intimidation and demagoguery to impose these unreasonable policies on the banking system, and intimidate Republicans into not opposing the policies.

4. Add a bunch of Republicans afraid of being demagogued, who back down from any serious opposition to liberal Democrats enacting their liberal marketplace meddling.

5. Empower a couple of quasi government banking institutions who encourage the investment market to delve into risky securities based on the risky loans.

6. Multiply the pressure on the banking system by periodically increasing the requirements the banks must meet to satisfy the meddling liberal marketplace manipulation.

7. Then make it so the banks can increase their profit by multiplying the trading value on these risky loans without actually increasing the underlying value.

8. Next have the banks add to the risky loans supposedly less risky loans, but dole them out as multiplied securities so they can be just as risky too. And push these liberal loans so that housing prices balloon out of proportion.

9. Make it easily profitable by selectively reducing taxes for quick buck artists, and artificially drive up the cost of houses even more.

10. Liberally encourage the whole of society to live on the edge with easy credit and mega consumption and little saving (Dewey’s lack of morals).

11. Force banks to use an accounting system that makes valuing many securities impossible to figure out when they come due.

12. Tempt the investment banks to join up with the commercial banks and the insurance industry to enjoy the profits that the quasi government banks were already enjoying.

13. Liberalize the leverage rules so the banks can multiply the risk even more and make sure almost no one in the world escapes the coming crash.

14. Have the most influential liberal economist of his time insist on creating “a housing bubble to replace the Nasdaq bubble”.

15. Then artificially hold interest rates down so everyone can eagerly get in the credit game and get equally fleeced when the inevitable crash comes.

16. And finally, ignore all warnings and limit the creation of any preventative legislation and preserve the government programs that are creating the crisis.

So there you have it – the most delicious recipe for a global economic meltdown anyone could ever devise.ax

• Financial crisis not a result of the free market

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If this had purely been a free market capitalism problem you would have had to remove John Dewey’s educational influence and the resulting moral and financial deficiency, a meddling Democratic Party that imposed on the market over and over, credit securitization, the CRA, the DIDMCA, the ECOA, the HMDA, the FHA, the FHEFSSA, HUD, ACORN, liberal race baiting, Freddie Mac and Fannie Mae, a resistant Democratic Party that refused to allow the reigning in and prosecution of Freddie Mac and Fannie Mae, mandatory fair value accounting, and the Federal Reserve. I had a guy in a forum adamantly insist that it was a free market failure that caused the financial crisis. But America has not been a predominantly free market economy since the 1920s. So I asked him a few questions: You think Social Security and Medicare are free market? Trillion dollar deficits are free market? Forty different blends of gasoline are free market? Farmer subsides are free market? Backdoor EPA cap and trade is free market? Socialized medicine is free market? Government motors is free market? Banning drilling in the Gulf is free market? Food stamps is free market? Government subsidized “green energy” is free market? Refusing irrigation water for farms because of a minnow is free market? A bridge to nowhere is the free market? Public Education is free market? (Needless to say he never got back to me.) I could have also asked him if TARP was free market? Is a $862B stimulus package free market? Are government mandated sub-prime mortgage loans free market? Is affirmative action hiring free market? Is the Post Office free market? Is a government subsidized train system free market? Are tariffs and trades restrictions free market? Are government mandated student loans free market? Is a two foot thick healthcare code free market? Is a four foot thick tax code free market? Is one third of “total wages and salaries” paid for with government money free market? [4d2hgww] Is $1.75T per year spent on regulations free market?ay

• 600 federal agencies is not the free market

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Tell me this, American neighbor: Do you think 600 federal agencies is a free market? 600, for gawd’s sake! [*3ywl65] [46] Go to the link and look at them, American neighbor. Every one of them are either creating regulations, and/or enforcing regulations, and/or providing the services of regulations, and/or dreaming up regulations, and/or interpreting regulations, and/or cataloguing regulations. It took me fifteen minutes just to count them. It would take hours just to read the name of each one. And, in fact, this list is not complete. Apparently, the federal government is so convoluted that there is no way to identify all of them, [*cq9cgnt] (And then imagine if we added all of the states’ agencies – we’d be looking at thousands!) Liberals call this a free market?!? I call it government by liberal paranoia – progressive fascism. Liberals are terrified of everything that might hinder attaining utopia, so everything must be controlled, regulated and manipulated toward that end – progressive-fascism.az

• Carrot & stick capitalism

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The very idea of regulating America into prosperity is what created the current mess. (This is all a result of FDRHoovernomics – more later.) In fact what we have just witnessed with the American economy is death by government manipulation and regulation – and a resultant Obama Malaise perpetuated by them. Liberal intervention in the marketplace has distorted the risk/reward relationship between the government, banks, investors, business and consumers. An efficient economy is a two-sided coin: Free market principles combined with stringent application of the law. This allows for maximum efficiency through competition which promotes entrepreneurial risk and innovation while preventing cheaters from prospering and distorting the marketplace. This is consumer demand capitalism where the marketplace ebbs and flows naturally without the distortions of over-regulation and corruption. What we have instead is a plugged-nickel economy with one side being financially ignorant consumers (thank you John Dewey) and the other side a government attitude that thinks it knows how to manage the marketplace better than those who operate in it (thank you again John Dewey). Because of this the American economy has evolved into carrot and stick capitalism, with a free market that has been regulated to death where both industry and government corruption are ignored and even encouraged – as in official approval by government sanction for the likes of Freddie and Fannie, and ACORN, unfair subsidization and penalization, and over-regulation, and bailing out entities that deserved to die. This is how the once great American economy has spiralled down the toilet bowl. Talk about blaming the victim – it is the free market that is the victim. The marketplace is riddled with regulatory bullet holes, and liberalism has been caught standing over the body holding a smoking gun – progressive-fascism!ba

• John Dewey + liberalism = financial crisis

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Do you have doubts, American neighbor? Are you still thinking of scoffing off everything I have presented? Well, don’t just take my word for it. First let’s hear from liberal NY Times columnist and Nobel winning economist Paul Krugman:

~The point is that these bank executives are not free agents who are earning big bucks in fair competition; they run companies that are essentially wards of the state. There’s good reason to feel outraged at the growing appearance that we’re running a system of lemon socialism, in which losses are public but gains are private.~ [ykeu8jt]

Yup, there is no doubt that some banks (except for many that paid the price and completely crashed, and many more that are in a slow motion crash right now) eagerly made out like bandits in the “lemon socialism” imposed on the market by government interference and manipulation, but when the process that led to that “lemon socialism” hit the wall in 2008 just about everybody took the hit. It certainly was NOT a system of “fair competition”. Here is what liberal NY Times columnist, Thomas Friedman said to the University of Delaware’s Class of 2009:

~My generation, the Baby Boomers, well, we’ve been the Grasshopper Generation, eating through just about everything like hungry locusts. […] Oh, we had our moments to be proud of, but I’m afraid that we took many of those freedoms that our parents sacrificed to create for us, and we used them to go to excess. The subprime mortgage mess is, alas, a monument to all of that. […] The whole system depended on a decline in basic values, ethics, risk management and accountability between borrowers, brokers, lenders and investors.~ [33547y5]

Can you say, ‘John Dewey’, American neighbor? Friedman poignantly states, “The whole system depended on a decline in basic values, ethics, risk management and accountability between borrowers, brokers, lenders and investors.” This is John Dewey’s resultant liberalism on brilliant, full neon-colored display! [ab9x3j] The only thing Friedman left out was a large intrusive government that acted as the Pied Piper and led everyone into this “decline in basic values, ethics, risk management and accountability” with its impositions on education and the marketplace.bb

• My summary of the causes of the 2008 financial crisis

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I could not sum up the financial crisis better in so few words. But I’ll give you my take about the great twenty-first century financial crisis [takes a deep breath]: It all boils down to decades of marketplace meddling by wholly incompetent, know-it-all liberal politicians bullying a spineless opposition with race baiting, creating out-of-control quasi government agencies, legislating banks to provide easy credit, who naturally welcomed the short term easy profits, to satisfy insatiable consumers. Was the free market to blame? Only as much as government meddled in parts of it and then refused to reign in their own creations like Freddie Mac and Fannie Mae, and if the free market did contribute, it was only because it was defenseless against a John Dewey who pushed the education system to stop teaching sound economics and moral responsibility and instead implemented an entitlement and do-whatever-you-want-and-have-fun-now-regardless-of-the-consequences attitude into society. Ever since Herbert Hoover’s and FDRHoover’s big spending splurge that extended the Great Depression by over a decade, the government has provided an example to the American people to live on credit instead of saving and living within one’s means. Save for your healthcare? Naw – there’s always Medicaid or Medicare. Save for your retirement? Naw – there’s always Social Security to fill the holes. Need a new flatscreen? Sure – there’s always Food Stamps for food. Need a to buy a house? Sure – there’s always a subprime or teaser rate mortgage. The nineties came along with financial markets seemingly always rising and easy credit available to buy anything and everything, so in the 2000s the Federal Reserve began to keep interest rates artificially low to further encourage this entitlement attitude to consume on credit instead of saving and living within one’s means. Liberalism had taken the handoff from John Dewey and run with it. The nanny state removed the incentive to save and promoted the desire to live on credit. It is no surprise that the most indebted states are also the most liberal with the most government entitlements. Thank you John Dewey. And thank you liberalism. Oh – and a special “shout out” thanks to Barack Obama who agitated against redlining as a community organizer and as a lawyer fought a lawsuit against Citibank redlining to force them to provide subprime loans. [d3a95z6, *cdhl7pq] And of course, we must not forget Paul Krugman’s generous contribution.bc

• The Democrats have done nothing to correct the real problems

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As of this writing, more than a year after the crash, the OTC derivative market is still unregulated, security insurance still needs to be overhauled, subprime mortgages are still common, [yh4ynuc] Freddie and Fannie are in worse condition than before the crash, but still operating as though it is business as usual, fair value accounting is still in force, and nothing has been done to reform or punish the ratings agencies. The one major piece of deregulation that liberals pointed to was the repeal of the Glass-Steagall act. Have Obama and the majority Democrat Congress reversed this? No. They only used it to demagogue Republicans. They don’t seem to give a darn about it (revealing that they didn’t ever really see it as the problem, but simply as a demagogic weapon), or Freddie and Fannie or subprime loans or the derivative markets or that teaser rate mortgages and the commercial real estate market are both currently in precarious positions. Indeed, their attitude seems to have been articulated by Rahm Emanuel, “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.” [dk9my9] Democrats under Barack Obama have been intent on ramming through big government takeovers of the private sector with healthcare, cap and trade, auto union bailouts and card check, while completely ignoring the lingering problems that they and their predecessors created that led to the financial crisis. Liberals refuse to learn from their mistakes, so Barack Obama and the Democrat controlled Congress did NOTHING to prevent another similar crash from developing in the near future. Predictably, since they are completely blind to their own liberalism’s contribution to the development of this crisis their financial regulatory reform has not addressed any of the prime problems and is almost undecipherable. All they do is whine that it was all Bush’s fault without ever articulating exactly what Bush supposedly did to cause the financial crisis, or addressing it. (Every time a Democrat blames Bush they should be asked exactly what Bush did and when will their legislation be ready to fix it? The empty response will tell you everything you need to know about their actual understanding of the crisis.) The Democrats controlled Congress for the last two years of the Bush administration. Did Bush hold a gun to their heads to pass his legislation or deregulation that they claim supposedly caused the crisis? Where is all of their preventive Democrat legislation that Bush, I guess, supposedly vetoed? Blaming Bush is just more liberal demagoguery. In fact, the vast bulk of the evidence points directly to John Dewey, his resultant liberalism and the Democratic Party as the major villains behind the housing boom and bust and the resulting financial crisis – progressive-fascism.

Update 2011: At this writing, more than two and one half years after the crash, President Obama has created another giant regulatory agency called the Consumer Financial Protection Bureau. [3lvc63a] Will it address many of the cumulative causes of the financial meltdown? No. Its focus is to be on the banks and the consumer marketplace – though contributors, they are mostly symptoms not the causes. The root cause is the carrot and stick capitalism liberalism has imposed on the marketplace (exactly what this new agency is a part of). So would this new agency have been able to see the crisis coming? No, there is no reason to believe they have employed any prophets to foresee the future. And since when will some government agency that answers to the President start screaming that his policies are about to cause a financial calamity? Yeah, right. Will the warnings be legitimate or based on politics? And to think that this sort of warning would not be instantly politicized by either or both parties is beyond naive, especially in an election year – especially in a presidential election year. Would this new regulatory body have been able to prevent the financial crisis of 2008? No, it would have contributed to the problem just as virtually all of the other regulatory agencies mentioned above did. After all, we have already been told that its focus is not where the real causes were. Will this new agency prevent another crisis? No, it will probably be a net contributor to the next crisis with its new onerous regulations and picking of winners and losers. And here is more regulation of concern. [*3zqhrwx] Remember the inevitable unintended consequences of liberalism – it is practically guaranteed. Meanwhile it just expands liberal meddling by tightening the government’s grip on the private sector marketplace and will surely encourage an extension of the current economic malaise (the Obama Malaise) by introducing even more uncertainty – progressive-fascsim.bd

• Where are the prosecutions?

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Still not fully convinced? Then explain this for me, American neighbor. Remember back at the turn of the century in the dot com bubble bust when the heads of dirty 1990’s companies went to jail? Do you not find it interesting that no one has gone to jail this time, American neighbor? There were all of those companies like Enron, Tyco, Worldcom, Arthur Anderson, Global Crossing, Nortel, Rite Aid, Xerox, etc. that were labeled in the media filter as ‘Republican’ type companies, even though many of the dirty players were big Democrat donors. Back in the eighties people also went to jail in the savings and loan scandal. Well that was then and this is now. Apparently when big liberal financial institutions, big liberal politicians and big liberal activist groups screw up the global economy at a rate ten times that of the previous bubble bust or savings and loan scandal, that is somehow excusable and nobody need go to jail. And what about the supposed September run on the banks? Why has there been no investigation into this? [yju6hos] (Another 800 pound gorilla.) At the very least whatever happened probably directly affected the outcome of the presidential election and may have been precipitated just for that purpose. Where are the investigations, American neighbor?

I am not going to name names (there are way too many), but the liberal media have done their job in covering up the party affiliations of many of the big players in this crisis. (Hint – who do you think were one of the largest groups of campaign donors to Barack Obama’s presidential campaign? [Cough!] – credit industry – [Cough!]) This wasn’t a problem of free market capitalism. (Which quasi banks made off with profits for years on known toxic securities that were insured multiple times to benefit from their eventual inevitable collapse? [Cough!] [Cough!]) This whole episode is better known as crony capitalism, or in the vernacular of this essay series, carrot and stick capitalism, which has inevitably gone wrong. (Who is it that picked up assets from other failed competitor institutions for pennies on the dollar? [Cough, cough!]). And if there had been prominent Republicans or Republican supporters behind this you and I both know, American neighbor, that the Democrat House majority, Democrat Senate majority and the Democrat Department of Justice would have been fighting over who they could investigate first. (Which companies received enormous bailouts that were Democrat creations in the first place? [Cough!] Freddie and Fannie. [Cough!]). There would have been “truth commissions” out the wazoo if they thought they could have pinned this on Republicans! (Which auto companies were bailed out to preserve a union sector that wholly supports the Democrat Party? [Cough!]). The liberal media would be screaming blue bloody murder at the Republican party! (Which failing media sector do you think will get bailed out next for not going after Democrats? [Cough!] At least that was their hope until the “shellacking”. [Cough!]) The justice department would have been so swamped with Republican prosecutions that trying foreign terrorists on American soil would have never entered their minds (it is my position that this was ever only a diversion by the Obama administration).

The corrupt players were liberal Democrats, so just as we learned in #2 Contemporary American Liberalism = Paranoid Delusion, they can be forgiven, or at least their sins ignored. It would just not do to have big time liberal Democrats held to account. That is strictly reserved for bubble busts and financial crisis that can be pinned on Republicans. [*7zjxyh8, 7azmexv]

~Clinton’s DOJ prosecuted over 1,800 S&L executives, senior officials, and directors, and over 1,000 of them were sent to jail. … Between 2002 and 2008, this task force obtained over 1,300 corporate fraud convictions, including those of over 130 corporate vice presidents and over 200 CEO and corporate presidents. In 2009, the Justice Department promised more of the same. … the federal government has yet to file a single CRIMINAL prosecution against any top executive of an elite financial institution.~ August 6, 2012 [8ngaz7v]

The reasons are obvious, aren’t they, American neighbor? The Obama DOJ is run by Wall Street liberals to protect Wall Street liberals. Think Jon Corzine, former Democratic Governor of New Jersey and later, head of MF Global. When it collapsed $1.6B of investor funds was lost. This was after off the balance sheet use of customer funds were used to prop up failing company funds. Unsurprisingly, no charges will be laid. [*d9echeq, 7cjs5xp]

Where is the outrage from the Occupy Wall Street types? Additionally, if Wall Street is targeted for prosecution, the whole mess would inevitably end up at the feet of Democratic politicians and their manipulation of the marketplace. Wall Street may well end up exonerated from the direct causes of the financial crisis, while Democrat politicians are proved to be the actual culprits.be

• Crux of the problems = Fannie Mae & Freddie Mac

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Look, American neighbor. Let’s go directly to the financial crux of this whole sorry mess – Freddie Mac and Fannie Mae – two quasi banks created and nurtured by liberals over a period of decades to manipulate the mortgage and credit market. And manipulate the market they did. As ordered by their political masters Freddie and Fannie bent and stretched the operating rules of the marketplace. They initially made tons of money with their unethical and illegal banking practices. It has now been determined that as early as 1993 Freddie Mac and Fannie Mae had deceptively reported less than prime mortgages (subprime and Alt-A) as prime mortgages that supposedly possessed little risk when, in fact, they were very risky loans. [2795fxk] In 2006 the Office of Federal Housing Enterprise Oversight concluded:

~The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade … Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO~ [cdyvj6u]

Huge bonuses were paid out to top executives from 1998 to 2004 based on fraudulent accounting, further encouraging private banks to get into the credit securitization game, not realizing that Fannie Mae’s apparent prosperity was all a sham, with the risk much higher than implied. It wasn’t the free market that needed regulating. The primary problem was the distortion and corruption of the marketplace created by Freddie and Fannie playing games with the CRA regulations and accounting procedures. Private banks saw those profits from loans that under normal free market principles and honest reporting would never have been made and thought they were missing out on profits from a legitimate market vehicle. After all, Freddie and Fannie were competitors of the private banking industry. It turned out that fully 27 million of a total 55 million mortgages were high risk – nearly 50%! Liberal governments ordered Freddie and Fannie to play loose and fast with the rules and the private banking industry simply followed their lead, so the mortgage backed securities market ended up bloated with a multitude of officially blessed risky loans from Freddie and Fannie and the rest of the private banking industry, as well as with an unknown amount of risky loans hidden as prime loans by Freddie Mac and Fannie Mae. Hello, financial crisis! No wonder no one had answers when the crisis hit. No one could have. It turned out to be impossible to tell how much risk the market had taken on – all a result of liberal government intervention into the private marketplace.

Think about this, American neighbor. There had never been an economic situation before where the banks voluntarily made systematically questionable loans that risked their own viability. Left to the status quo without government interference into the credit market, banks would have continued to only make relatively safe loans. The financial crisis would never have developed. It was the government direction of Freddie Mac and Fannie Mae that led to a dismantling of a naturally weary banking industry in favor of the risky loans that brought down the economy.

Freddie and Fannie are now virtually government owned and are still hemorrhaging tens of billions of dollars per year after already costing 130 billion tax dollars to bail out. Total taxpayer liability for debt and loan guarantees is now estimated at a staggering, kick-in-the-chest eight trillion dollars! [8y8nozx] This is after liberals originally assured when empowering these behemoths that they would never cost taxpayers one red cent. Can you say “unintended consequences”, American neighbor?bf

• Little Wall Street corruption found

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And the current Democratic government is so confident that it has learned its lesson that it is still manipulating the mortgage market with them – the liberal ‘fun’ of instituting utopia continues! Read these two articles (note the dates and the current foreclosure numbers – yikes!) and then I dare you to tell me this was all a failure of free market capitalism. [*27cajwu, *7683tjo] And here is another inconvenient little finding that dispels this idea that it was the free market that caused the economic failure. In fact, little corruption was found in private sector Wall Street firms directly related to the financial crisis. [ycvw6za] There was no large infusion of “predatory lending” in the market by the Wall Street titans. It was the smaller lenders around the country that were most at fault, but again, the whole system was enabled by Democratic politicians manipulating the marketplace with supposedly good intentions that then inevitably produced horrible unintended consequences. This is a story of ever progressing carrot and stick capitalism – progressive-fascism. Freddie and Fannie were and still are the financial ground zero of the artificial housing boom, the bust, the resulting financial crisis and the continuing Obama Malaise. This is because liberals have protected Freddie and Fannie from any real reform right up to this day. [7wfnspu] Here is how the “official” government inquiry (by majority Democrats) was described in the dissent:

~Like Congress and the Administration, the Commission’s majority erred in assuming that it knew the causes of the financial crisis. Instead of pursuing a thorough study, the Commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions—that the crisis was caused by “deregulation” or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives and a financial system addicted to excessive risk-taking. … Accordingly, the Commission majority’s report ignores hypotheses about the causes of the financial crisis that any objective investigation would have considered, while focusing solely on theories that have political currency but far less plausibility. … The Commission interviewed hundreds of witnesses, and the majority’s report is full of statements such as “Smith told the FCIC that….” However, unless the meeting was public, the commissioners were not told that an interview would occur, did not know who was being interviewed, were not encouraged to attend, and of course did not have an opportunity to question these sources or understand the contexts in which the quoted statements were made. … In the end, the majority’s report turned out to be a just so story about the financial crisis, rather than a report on what caused the financial crisis.~ [44xexdz]

The report was a whitewash and a lynching. And if you think the crisis is over you are still dreaming in ‘subprime’ colors, American neighbor. Thank you so very much, liberalism! [*klpb3l3, *ybvh2lo, *39mksaa, *7lvpwvv]bg

• Was it a credit crisis?

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While everything I have documented above is in the public record, and in confluence created the crisis of 2008, there still remains one question we have not dealt with: Was it actually a credit crisis or was it something else? There was certainly a housing bubble caused by liberalism which burst, but was there more to this crisis than that? It has certainly been billed throughout the media filter by politicians, economists and other supposedly in-the-know financial people as a credit crisis where credit supposedly evaporated and threatened the world’s whole economy. But was there a crisis beyond the housing bubble bust and related industry bankruptcies, or was it also the credit and derivatives market that was the problem? Apparently post-crisis examination of the evidence does not support this assertion. [6ypqx5, 3yj2ze3, 5tsltt] Have we been sold a bill of goods, American neighbor? In fact, outside of the financial industry, corporate leveraging compared to assets has been trending downward for thirty years. Non-financial sector leverage utilization in 2005 was over 70% lower than in 1975. [7urdtus] This does not indicate an inflating credit bubble. Indeed it has now been claimed by none other than Secretary of the Treasury Timothy Geithner that the real threat was not the unregulated derivatives market, but the very regulated insurance industry. [yhfqdl4] So what actually happened when all of these confluent ingredients collided in 2008? Was there an actual credit crisis? Or were we hoodwinked into reacting to something that wasn’t there? Or was it something we have not been told about? Was the “credit crisis” claim only a cover up for something more insidious? Was the housing bubble bust just the next step in manipulating the market even more?

Update 2014: Could this revelation provide some insight to what really happened? Who knows for sure, but it creates more questions than it answers. [*nyn287s]bh

• Why the TARP program, the stimulus, the bailouts?

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Because if you think the $700B TARP and the $862B stimulus package were the only financial responses to this crisis, think again. They were only a drop in the bucket! [*yed6of8, *3y543ps]

And it was all done in secret! This raises some very disturbing questions that are yet unanswered about this so-called crisis. This was all justified based on the assertion that banks would not lend to other banks or industry, and claims that the Federal Reserve supposedly saved the world from a catastrophic economic meltdown. But again, the post-crisis analysis of the data shows NO bottleneck of credit. This begs the question as to what was the actual reason this was done? The Federal Reserve chose not to allow the marketplace to naturally cleanse itself of the deadwood through bankruptcies and acquisitions, as is the normal route of the free market system. This would have concentrated the pain in a short period of market adjustment. Weak entities would have been absorbed by stronger entities, with a leaner, more efficient market being the result. So did the Fed instead exchange a short period of purging for a prolonged period of malaise with even more pain, lasting decades, as happened to Japan with their “Lost Decade” of the 1990s (which is a misnomer, because it still continues today), and the Great Depression of the 1930s and forties? I guess we will find out the hard way. At the point I am writing this, over two years have gone by and there still is no sign of a robust recovery. Indeed, it is not clear that the economy may not turn down further. [*4dktykd] But there is no doubt that this is a liberal manipulation of the marketplace, completely run amok, American neighbor. Will we ever get to the whole truth of the matter? Seems likely not…bi

• ‘Too big to fail’

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[Update Nov. 28 / 2011: I completed the rest of this essay more than a year before this update, but today we may have a clearer picture (or maybe not). It seems the banking bailout was much, much more than it seemed. It has today been disclosed that the Federal Reserve has released $7.77T dollars in loans to banks all over the world. [7qtcwgm] Does this answer the question of whether it was a credit crisis or not? Does this imply an answer to what may have happened in mid-September, 2008? Are we looking at so many weak banking monopolies (too big to fail) that if allowed to fail they would destroy the world economy? And are we now looking at so many weak, large financial institutions that have been artificially propped up, that the world is doomed to suffer an economic malaise for decades as these toxic institutions continue to poison the world economy? Is a worldwide regulatory restriction on banks and nations the only way to limit banks from placing the world’s assets at risk to satisfy artificial government-mandated shortcuts to supposed egalitarian prosperity through ignorant manipulation of the marketplace, leading to extreme risk-taking by the banking industry? Perhaps America could begin this process by purging all government mandated manipulative legislation and policy. The banking industry should be compelled to preserve a minimum insurance level of assets compared to risk investments – the bigger the bank, the bigger the insurance assets. Another idea might be to progressively tax profits from leveraged positions – the higher the leverage utilized, the higher the taxes on those profits. It is either these sorts of solutions or enacting monopoly laws to prevent too big to fail. If these things are not done, look for more of the same (this is important), since now the banking industry has experienced that no risk is too high to take, because the government (through the Fed) will have no choice but to bail them out again. If there is one lesson to be learned from this fiasco, it is that manipulation begets more manipulation, and guarantees more necessary manipulation of the marketplace in the future. Eventually no amount of manipulation will save us from a worldwide marketplace collapse. At some point one must simply stop manipulating and begin unmanipulating, before there is nothing left to manipulate.]bj

• How did accountants & economists get off the hook?

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I have one last point I would like to make, American neighbor. There are two groups that have incredibly, avoided public scrutiny altogether. First are the accountants. It’s their job to know what’s going on in the here and now wherever they are employed. Surely, some of them could see the trends in their numbers over the previous few years to the housing bubble crash. Where were their warnings? The second group is even more culpable than the accountants. The failure of accountants is at least only the result of a passive responsibility. This second group represents the dirty hands of proactive responsibility. They are the witch doctors and voodoo artists that operate in the bowels of every financial institution, university and government agency. If any one group of accredited professionals are responsible for the financial crisis and the following Obama Malaise it is economists. Economists are the ones who study the economy and make the recommendations. Economists are the ones who are supposed to alert against imprudent financial decisions. They are supposed to be the ones who ring the warning bells. Apparently a survey of tens of thousands of economists worldwide has found only twelve who rightly projected the financial problems of 2008. Twelve. Instead, economists are the ones who devised many of the market manipulations that led to the problems. Economists failed us, American neighbor. Uh – let me be a little more specific. Liberal economists especially failed us. Conservative economists resist manipulation of the marketplace. Liberal economists play like they are some sort of gods that can manipulate the marketplace into utopia, and yet they are also the ones that led America on a leash directly into this disaster. I’ll deal with them more in the next N.C. essay and you will see what I mean – they’re still doing it.

Update 2013: Documents released from 2007 illustrate the lack of concern at the Federal Reserve at the time: [ozszxrj]

Update 2015: A new book has been released that reveals the political cover-up by Democrats in their partisan report on the crisis. [q3bftlt]bk

• Deprogramming Lessons

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So again we see our second principle of liberalism: Without irrational double standards contemporary liberalism cannot exist. And: For contemporary liberals superficial rationalization is always the first and final element in their ideological line of thought. Except in this case it should be: Without double standards liberals would go to jail and liberal politicians would have been forced to resign their House and Senate seats, and would have been disgraced from running for President. But, of course, they are covered by another liberal principle: A contemporary liberal’s honorable motives and noble fight against contemporary conservatism excuses all liberal failures and indiscretions. And protect themselves with this one: Contemporary liberals project what they subconsciously loathe about themselves as demagoguery toward their opponents and society as a whole. Even the destruction of the American economy. Make no mistake about it, American neighbor. All of those government meddlings in the marketplace, all of those community agitator groups, all of those eyes looking the other way, were an attack on conservatism and the free market it embraces. And the result was because of this liberal principle: Contemporary liberalism requires a strict adherence to playing stupid. Liberals willingly turned a blind eye to the upcoming consequences of their marketplace meddling that they had been warned about for over ten years. Contemporary liberalism relies on a programmed, instinct-like scoff reflex to preserve itself from the consequences of critical thinking. The so-called credit crisis of 2008 is a direct result of a decades old liberal assault on contemporary American conservatism and free market capitalism. For the contemporary liberal groupthinker, sophistry and demagoguery are the weapons of choice against critical thinking. Obviously liberalism won this round – and America lost.

Liberals think they can manipulate anything into their desired results. And they see their manipulation as necessary: Contemporary liberalism views society as generally incompetent and in need of the guiding hand of a controlling government. Liberals created the need for their manipulation with the justification that without their help the poor would never be successful: Contemporary liberals employ chaos as a political strategy to destabilize society so that liberal solutions can appear more palatable. And they self-justify their manipulation with this principle: For its own good a resistant society must have utopian ideals forced upon it. And of course they exempt themselves from any fault: The essence of contemporary liberalism is that the individual is blameless and society is always guilty. But this whole episode just turned into an immense economic education of the liberal principle: Contemporary liberalism is rife with unintended consequences. Liberals are so fearful that utopia cannot be reached without their manipulative “help” in the marketplace that they “helped” the economy directly into the ditch: Compulsive paranoia is the foundation of contemporary liberalism. And of course none of this would have happened if American society had not been conditioned with no economic morals into accepting government manipulation as normal: Contemporary liberalism is a type of societal conditioning.bl

• Too little regulation?!?

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Remember we began this essay discovering how over-regulation is killing the golden goose. And we have since learned that over-regulation and manipulation of the marketplace were the direct causes of our current economic problems. I recently read a Huffington Post article by some alpha liberal who touted himself as an expert champion of regulation. However he then shot his own braggadocio in the foot by claiming that the financial crisis and current Obama Malaise were the result of too little regulation! (LOL!) Anyway, it was his contention that there are no current regulations that need to be abolished. (Seriously. I am not kidding.) And no regulations have detrimental costs. [stunned disbelief]

Because I can’t always tell if a liberal has to drive himself to play this stupid or if he is just talented at it, I asked him: “Tell me – do you have to really work at playing stupid, or were you born a natural?” I also said this: “You want an example of regulation that has cost? How about the ban on DDT which has literally cost tens of millions of lives!” (I slightly edited this, but the gist is accurate.) Unsurprisingly, just as with the guy I mentioned above who insisted to me that it was the failure of the free market that caused the 2008 financial crisis, this ‘expert’ never got back to me to answer my question. (Too bad, I would have really liked to know which it was.) [wink]bm

• I propose one more government agency

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Ironically, I would like to propose one more regulatory agency – a regulatory agency to regulate the regulatory agencies. The mandate would be to identify wasteful manipulations, regulations and agencies that produce lost opportunity costs and recommend actions to eliminate them. Following through on those recommendations would be a real stimulation for the economy!bn

• Liberal manipulation wrecked the marketplace

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Ask yourself this, American neighbor: What do alpha liberals do? They are paranoid, so they MANIPULATE! That is exactly what happened with this supposed economic crisis (in many more ways than one). Knowing what you now know, ask yourself this, American neighbor: If all of the liberal manipulations of the marketplace over the decades could be magically removed would we have still ended up with a housing bubble? No, I don’t think so either. For decades liberals manipulated the real estate marketplace and – BINGO! – they WRECKED it! (Today, March, 2011 one out of eight homes in America are vacant!) Liberals figured they could regulate the marketplace into producing a utopia where everyone would own a house, and two cars, and large screen TVs, whether they could actually afford them or not. (A 2012 study has confirmed the role of the CRA in creating the housing bubble and financial crisis. [cm8px6q] See the accompanying graph.) And then when a crisis hit, they threw more government manipulation at the problem in the form of massive artificial money infusions into the marketplace along with massive new regulation, creating the worst of all scenarios, a devalued dollar, major debt, coupled with future inflation (that is only being held back by the Fed’s quantitative easing) and an economy in a malaise with no end in sight. Instead of allowing the marketplace to cleanse itself through failures and realignment, world governments have just kicked the can down the road. We will be very lucky if there is not another financial crisis before long, because the same imbalances in the marketplace that caused the 2008 crisis, are still in place for a repeat. [7psvo94] All of this has completely sapped the business community and consumers of any confidence in the future, thus keeping everyone sitting on their hands economically. Certainly, the current Obama Malaise is nothing more than a slow motion financial crisis. So now America may be paying for those manipulations and regulations for decades to come. Some utopia…bo

• So, is the solution more liberalism?

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So let’s re-examine our MCTE question: “As a principle, does more government control result in more opportunity for prosperity on a national scale, or less?” Let’s look at recent history. In the past twenty years government control has exploded, while the economy has sunk into a malaise with no apparent end in sight. This whole story is a classic case of the modern corporatism of carrot and stick capitalism gone bad (both defined in #6 Tyranny Versus Liberty). California epitomizes liberalism in almost every way – especially its unintended consequences. [*6pnups9, *6o9hec8] So, American neighbor, do you think higher taxes, more regulations, more unionization, more licensing requirements, bigger public sector benefit packages with earlier retirement, more environmental restrictions, and a massive increase in government spending would turn around California? No, I don’t think so either. And neither do Californians – they are simply leaving. [b787hte, *d3ms65a] More bondage to the government will not bring about more prosperity and liberty, but less. Americans live on credit rather than saving because they have been conditioned to put their faith in a serfdom that believes the government will take care of their needs. The financial crisis of 2008, the continuing Obama Malaise, and the current government and personal debt crisis in America are all a direct result of liberalism. If you still think more regulation is the answer, read these and give your head a shake: [*d2zalus, *9jw7jbo, *ae6tw2u, *kdr2mbh] What is criminal about this is that Dodd-Frank doesn’t actually address any the real problems from the financial crisis and following malaise. It is just more regulation for the sake of regulation. In fact, since Dodd-Frank the amount of large banks (above $10B in assets), which are considered the embodiment of evil by liberals, has turned around from a decline since 2005 into a growth industry. Conversely, the disappearance of small banks continues unabated. [kl9fw29] Read this about an actual banker who went though the 2008 financial crisis first hand: [*cel8p47] And then read this to see how the new swaps regulation just makes things worse with oh-so familiar unintended consequences: [*d2465eb]

Thanks for persevering through what is arguably the most mundane and arcane essay of the series, American neighbor. The next N.C. essay will be a much lighter read (and more educational).bp

• Deprogramming exercise

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Update 2010: Here’s a tip. With the massive unemployment and underemployment as a result of the Obama Malaise, look for the next credit bubble bust to be student loans. Bailout, anyone?

Remember our MCTE quote from the beginning of the essay?

~Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a law-breaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.~ – Louis D. Brandeis – Source: Dissent “Olmstead v. United States”, 277 U.S. 438, 485 (1928)

Update 2014: Some interesting details were revealed in a recent Clinton administration document release. Internal statistics confirmed political pressure on regulators and banks to make high-risk loans with veiled and not so veiled threats, treasury Secretary Robert Rubin bragged up the CRA and increased subprime loans, and Glass-Steagall deregulation was held to ransom for a strengthening of the CRA. [*m3857g5]

This essay’s exercise is the credit crisis itself (or whatever it actually was). Learn from your nation’s paranoid liberal mistakes, American neighbor. Around the world we have all certainly paid a heavy price for the lesson that liberalism in the marketplace is a VERY dangerous thing. But take a break at bedtime tonight, American neighbor. I wouldn’t wish slumbering thoughts of derivatives and Freddie Macs and Fannie Maes on even my worst enemy.bq

• Humor, sort-of

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This essay we end with a twist on our customary humor and instead provide a link to President Obama’s answer to the question as to who was responsible for the so-called credit crisis. If you have any doubts about my explanation of the supposed credit crisis I’m sure the President’s explanation will clear it all up for you. It certainly illustrates the depth of the President’s intellect and his grasp of the situation [wink]: [*cav282]

Update 2013: Is this President Obama’s idea of a sick joke?!? [*czxo6pa]